India and that dreaded D word

By - Research Team     05 September 2015

You must be well familiar with the word inflation. This is the general rise in prices of goods and services in Society.
You don’t have to travel far to see and feel its effects. Everybody’s complaining about inflation. The prices of onions and potatoes are forever rising. Vegetables and fruits are too costly to afford.
Yes…if all know what inflation means.
Have you come across the dreaded D word “Deflation”.
Deflation is the fall in prices of goods and services across the economy. This is the exact opposite of inflation.
This is supposed to be good, right…Everything is so cheap.
True, the urban customer jumps with joy when he hears the word deflation. The women of your house, who shop the most, are extremely happy. The prices of most goods and services have fallen.
The prices of fruits, meat and vegetables will continue to be high. However the prices of wheat, paddy, sugar, cotton and rubber will come down.
The urban customer is very happy, but someone has to cry.

What about the poor farmer?

The farmer who grows paddy, sugar, cotton and wheat is the most affected when prices fall. This farmer owns very less land. He gets almost nothing for all his hard work.
Farmers already face problems such as poor monsoons, costly fertilizers and poor compensation for lost crops. In order to encourage farming and make sure that farmers get good rates for their produce (food grains such as rice and wheat), the States in India purchase food grains at a fixed minimum price, which covers the cost of cultivation and ensures good profit to farmers.
This is the minimum support price (MSP), below which the farmer will not sell. The MSP has hardly increased, rendering farming meaningless.
The meager income the farmer gets by selling his produce, is not sufficient to take care of himself and his family. Not happy with this income, the farmer is desperate and abandons farming.
What will happen to you and your fellow citizens, who depend heavily on food grains such as wheat and rice? What will you eat?
The prices of food grains will be so high that you will not be able to afford them.

Why would deflation take place in India?

The prices of crude oil and commodities are falling rapidly across the World. Surely the availability of cheap crude oil should benefit India.
The manufacturing industry benefits from the lower costs of raw materials such as rubber, crude oil, commodities and production increases. This results in an increase in the supply of manufactured goods and a reduction in prices, because of an abundant supply.
However there is no demand for the goods produced and these products find no buyers.
There is no evidence to suggest that factories are manufacturing more goods. One thing’s certain…Hardly anyone’s buying
Hardly anyone’s availing loans from banks. This means buying of cars, houses and so on has been postponed.
There’s a recession in China …There’s no manufacturing going on there…China is a major buyer of commodities such as crude oil and iron ore across the World….With a recession China no longer wants to buy crude oil and commodities.
India’s exports are stalling…Nobody’s buying India’s exports.
This could mean those dreaded layoffs and loss of jobs.

Finally….Is India in Deflation

RBI aims to keep retail inflation (which measures the prices of food), within 6% by January 2016.The Consumer Price Index (CPI), for July 2015 which measures retail inflation was 3.78%.
However the Wholesale Price Index (WPI), for the month of July 2015 was -4.05%.
The WPI and CPI often move at different paces and even in opposite directions. The WPI and CPI are calculated using different baskets of goods and services.
The CPI measures the prices of services, which is not included in the WPI. WPI also does not measure change in housing prices.
WPI focuses mainly on crude oil and raw materials used in manufacturing industries.
Since prices of services, housing and retail food continues to rise, CPI has a value of 3.78% for July 2015.Since crude prices have fallen a lot, WPI shows -4.05% for July 2015.
Currently we may not be in deflation, but the threat is very real.

Under : Financial Planning